Stubbornly high inflation could prompt the Federal Reserve to take a more cautious stance toward cutting interest rates this year, the central bank’s former vice chairman said Friday.
Richard Clarida, who was Fed governor until January 2022 and is now a global economic adviser at asset management giant Pimco, said his former colleagues need to be wary of sticky prices that could derail plans to ease monetary policy this year.
At its meeting earlier this week, the Federal Open Market Committee indicated it would likely cut interest rates three times this year, expected to come at quarter-percentage point intervals. Chairman Jerome Powell said falling inflation and a strong economy gave policymakers room to make cuts.
“This could be more of a hope than a prediction,” Clarida said during an interview on CNBC’s “Squawk Box.” “I really hope that the Fed really goes into data-dependent mode, because if inflation is persistent and stubborn, it may well be that they shouldn’t cut rates three times this year.”
Markets are also expecting three cuts this year, although prices were cut after data showed higher-than-expected inflation earlier in the year.
Fed officials believe elevated housing inflation is on the way down, paving the way for a cut in its key interest rate from its highest level in more than 23 years. However, Clarida said the extent to which the Fed could cut interest rates is unclear.
“In a pretty broad range of scenarios, they will get at least one cut this year,” he said.
However, the math looks different as inflation data provides mixed signals.
The Fed prefers the Commerce Department’s personal consumption expenditures measure, with particular emphasis on the core measure that excludes food and energy. The 12-month PCE reading for January was 2.4% and the core reading was 2.8% – both above the Fed’s 2% target but in the right direction.
However, the most widely watched consumer price index in February was 3.2% for the overall index and 3.8% for the core price, both well above the central bank’s target. Additionally, the Atlanta Fed’s “sticky” inflation was at 4.4% on a 12-month basis and an even higher 5% on a three-month annual basis, the highest level since April 2023.
“If the Fed were to target the CPI right now, we wouldn’t even be discussing rate cuts,” Clarida said.
He also pointed out that while Powell said Wednesday that financial conditions were tight, they were actually “much easier than they were in November.” The Chicago Fed’s measure of financial conditions is at its loosest level since January 2022.
“What I think is going on here is a delicate balance [Powell is] “I’m trying to find my way,” Clarida said. “Financial conditions will naturally ease as they get the sense that the Fed is on its last legs.” [will start] Cut. Then, of course, that improves the economic outlook and may make it more difficult to bring inflation down to 2 percent.
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2024-03-22 15:47:07
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